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IMPORTANT
WARNING:
The contents of this report have been compiled in good
faith by Investorsoffshore.com to provide assistance
to investors, but do not constitute investment advice
or recommendations. Investors should not rely upon the
information given in order to choose types or routes
of investment but should make their own independent
enquiries before making choices. Investorsoffshore.com
has taken reasonable care in researching and presenting
the information herein but makes no representations
as to its accuracy and accepts no liability for actions
taken or not taken as a result.
Although 2003
was a good year for equity markets in the United States,
Europe and other developed economies, the real star
performer in terms of growth and returns was the emerging
market sector, which outperformed even the previously
untouchable returns of the burgeoning hedge fund sector.
Emerging
market equities soared by 52% in 2003 according to the
MCSI emerging markets index, when a record $12.5 billion
was poured into the 961 funds tracked by the index.
This growth was sustained into 2004, with emerging equities
recording an additional 8.1% growth.
Asian
markets performed particularly well. Thailand's stock
market experienced 85% growth during 2003 (in sterling
terms) with Indonesia posting similarly impressive gains,
posting a return of 79.3%. Other significant performers
included Taiwan's bourse which underwent growth of 31.3%.
Not
surprising then that Far Eastern funds produced some
of the best returns. For example, a UK investor investing
GBP1,000 in the best performing Far Eastern unit trust
(excluding Japan) at the end of 2003 would have had
just over GBP1,200 to show for his investment in mid-2004,
or a 20% return. Longer term gains have been more impressive:
GBP1,000 invested in the best performing fund over a
five year period would be worth over GBP2,400 at the
time of writing. Meanwhile, a high performing emerging
market investment would have turned GBP1,000 invested
five years ago into over GBP4,000 in 2004.
By
comparison, equity markets in the more established financial
centres returned more modest gains. Stock markets in
the US managed growth of 26.4% in 2003, whilst London's
markets rose a relatively small 13.6%.
While
many analysts feared that emerging markets were becoming
increasingly overbought and anticipated something of
a snap back in equity values in the near term, a poll
of 299 fund managers undertaken in February, 2004 by
investment bank Merrill Lynch appeared to indicate otherwise.
The survey revealed that 35% of the managers wanted
to be overweight in emerging funds through 2004. However,
a significant proportion of the respondents considered
emerging market equities as the most volatile of any
region or sectors globally, testament to the inherent
risks associated with the attractive returns.
One
only has to look at the series of financial crises that
have swept emerging markets over the last few years
to realize these risks, for example, the Russian debt
default in 1998. Not only did it bring down one of the
world's largest hedge funds in Long Term Capital Management,
it also sparked fears within the US government of a
melt down in the banking system. Other examples are
the Asian financial crisis of 1997/1998 and Argentina's
debt default in 2001. Even the jailing of former Yukos
CEO Mikhail Kordokovsky on fraud and tax evasion charges
in October, 2003 caused the entire Russian stock market
to fall 15% in one week.
So,
the risks and rewards of investing in emerging market
equities are plain to see. But what exactly is an emerging
market?
Many
international agencies consider all non-high income
countries to be "Emerging Markets", stressing
the potential of all nations to develop. Others include
only those countries that meet certain levels of economic
development and in which local equity and debt markets
are operating. In general, Emerging Markets countries
are characterized by an underdeveloped or developing
commercial and financial infrastructure, with significant
potential for economic growth and eased capital market
participation by foreign investors. Countries generally
considered to be Emerging Markets possess some, but
not necessarily all, of the following characteristics:
-
Per capita GNP of less than US $9,656 (the 2004 World
Bank definition of low- and middle-income economies);
-
Recent or relatively recent economic liberalization
(including, but not limited to, a reduction in the
state's role in the economy, privatization of previously
state-owned companies, and/or removal of foreign exchange
controls and obstacles to foreign investment);
-
Debt ratings below investment grade by major international
ratings agencies and a recent history of defaulting
on, or rescheduling of, sovereign debt;
-
Recent liberalization of the political system and
a move towards greater public participation in the
political process; and
-
Non-membership in the Organization of Economic Co-operation
and Development (OECD).
Countries that are usually considered classic examples
of Emerging Markets include Argentina, Brazil, India,
Mexico, China, Central and Eastern European nations
and Russia. Others that may be considered borderline
cases, possessing fewer of the above characteristics,
include Greece, Portugal, and Turkey.
Countries
which meet many of the definitions above, but which
have not yet been the focus of significant foreign investment,
are often referred to as "pre-Emerging Markets"
or "emerging Emerging Markets". These countries
include most of Africa, some Central American nations,
and a number of the former Soviet republics.
On
the debt side of the equation, the trading market for
Emerging Markets instruments demonstrated substantial
growth during the 1990's. When EMTA (the emerging market
trade association) began compiling its Annual Debt Trading
Volume Surveys in 1992, total reported trading volume
for Emerging Markets debt instruments stood at US $730
billion.
In
1997, annual reported trading reached nearly US $6 trillion.
In the aftermath of the Asian financial crisis in mid-1997
and the Russian financial crisis the following year,
trading volumes declined substantially, falling to US
$4.2 trillion in 1998, and to $2.2 trillion in 1999.
Volumes have gradually rebounded in recent years, reaching
US $3.1 trillion in 2002. These figures include trading
in 'Brady bonds', (exchange of commercial bank loans
for collateralized debt) sovereign and corporate Eurobonds,
local markets instruments, debt options and sovereign
loans.
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